Businesses produce revenue through selling their products to customers. Businesses can acquire these products through two methods--either producing them in-house or purchasing them from manufacturers. Choosing between these two methods is called the make-or-buy decision, or the outsourcing decision. Factors that influence the make-or-buy decision include both quantitative factors such as cost and time and qualitative factors such as the suppliers' trustworthiness and the quality of their products. Businesses should first conduct an analysis of quantitative factors before factoring in qualitative factors to complete their make-or-buy decisions.

Perform the quantitative analysis by comparing the costs incurred in each option. The cost of purchasing products from suppliers is the price paid to purchase them. In contrast, the cost of production includes both fixed costs and variable costs. For example: a business needs 10 units of its product in 10 consecutive periods; it can either purchase the units at $100 per unit or spend $1,000 to set up production facilities and $8 to produce each unit. Since the business spends $10,000 to purchase the products and $9,000 to produce the same number of products, it is better for the business to produce the products based on quantitative factors alone.

Consider qualitative factors that can influence the decision to produce the products. This includes all relevant factors that cannot be reduced to numbers, such as the experience of the business' production department and the quality of its management. For example, it might be possible that the business has no experience in producing a particular product and its prior experience in producing other products cannot be applied.

Consider qualitative factors that can influence the decision to purchase the products from outside suppliers. Examples of such factors include the suppliers' trustworthiness, the quality of its management, and the quality of its products. For example, it might be possible that the business' supplier has extensive experience in producing the product being considered and that the business wants to cultivate a long-term relationship with its supplier.

Factor the qualitative factors into the quantitative analysis in order to complete it. For example, in this case, although it is cheaper for the business to produce its products, there are reasons to believe that its products will be lower quality than those that it can purchase. Furthermore, since the business wants to cultivate a long-term relationship with its supplier, it might want to purchase its products from that supplier in order to initiate the relationship.

Come to a final make-or-buy decision once both quantitative and qualitative factors have been considered; this will depend on the business in question and what it is doing in order to earn its profits. Continuing to use the above example, although the business likely can purchase higher-quality products than what it can produce, the quality of its products might not influence its sales depending on its business model and what it is selling. If this is the case, the desire to cultivate a long-term relationship may or may not be enough to outweigh the $1,000 savings in costs; it depends on how badly the business wants the relationship and what it can hope to achieve by initiating it.

About the Author

Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.